Ticker League

Building a DCF model from scratch

This is the heart of valuation — and the skill that separates analysts from spectators. You’ll build a complete discounted cash flow model step by step, on a real company, and watch how each assumption changes what the business is actually worth.

Reading time: 35 mins

Lesson 2 / 6

A company is worth all its future cash — in today’s money

Strip away every multiple, every chart, every headline. The fundamental truth of valuation is this: a business is worth the sum of all the cash it will ever generate for its owners, discounted back to what that cash is worth today.

That’s the entire concept of a DCF — the heart of any fair-value methodology. Everything else is the mechanics of estimating those future cash flows and deciding how much to discount them. Build the intuition first, then build the model.

  1. Project future cash flows

    Estimate how much free cash flow the company will generate each year for the next 5–10 years, based on revenue growth and margins.

  2. Discount them to today

    $100 next year is worth less than $100 today. Use a discount rate to convert future cash into present value — the further out, the bigger the discount.

  3. Add a terminal value

    The company doesn’t stop after 5 years. Terminal value captures all the cash flows beyond the projection period, also discounted to today.

  4. Divide by shares → intrinsic value

    Sum everything, adjust for debt and cash, divide by shares outstanding. The result is your estimate of intrinsic value per share — compare it to the market price.
The discipline of a DCF
The output of a DCF is never “the answer.” It’s a structured way to make your assumptions explicit. The real value isn’t the final number — it’s that you’re forced to state exactly what you believe about growth, margins, and risk, and then test those beliefs.

Why future money is worth less today

Before the full model, internalize the single most important concept: discounting. $1,000 received in ten years is not worth $1,000 today — because you could invest today’s money and grow it. The discount rate captures this. Move the sliders and watch.

Present value calculator

What is a future cash payment worth in today’s money?

$10,000
10 yrs
9%

Present value (worth today)

$4,224

$10,000 in 10 years is worth $4,224 today at a 9% discount rate.

The formula behind it
Present value = future cash ÷ (1 + r)ⁿ, where r is the discount rate and n is the number of years. This single equation, applied to every future cash flow and summed, is a DCF. Everything else is detail.

The interactive DCF builder

We’ll value a fictional but realistic company — Meridian Software — through four stages. Adjust the assumptions at each step and watch the intrinsic value build up in real time. The final number is yours to defend.

dcf-model · Meridian Software

Current price $165

Start with what the company earns today, then project how its free cash flow grows over the next five years. Meridian generated $17B in free cash flow last year.

12%
25%
YearRevenueFCF
Y1$76.2B$19.04B
Y2$85.3B$21.32B
Y3$95.5B$23.88B
Y4$107.0B$26.75B
Y5$119.8B$29.96B

What you’re decidingHigher growth means more future cash — but be realistic. Few companies sustain 30% growth for five years. The FCF margin reflects how efficiently revenue converts to actual cash. Software typically runs 20–35%.

The honest truth about DCF
A DCF can justify almost any valuation if you nudge the assumptions. That’s not a flaw — it’s a feature. The point is to see what you’d have to believe for today’s price to make sense. If the price requires 25% growth forever, you’ve learned something important.
How this relates to the Fair Value tool
This lesson builds the full method: project the whole company’s free cash flow, discount it to an enterprise value, then bridge to equity value per share. TickerLeague’s Fair Value methodology uses a faster per-share variant — it discounts earnings, or free cash flow per share, directly. The discounting and terminal-value math are identical; the per-share version trades a little rigor for speed so it can run automatically across thousands of companies.

Sensitivity analysis — because one number is a lie

No professional presents a single DCF output. They present a range, built by varying the two most sensitive inputs: the discount rate and the terminal growth rate. This table shows how Meridian’s intrinsic value shifts across that range.

Intrinsic value per share — sensitivity table

Discount rate (columns) × terminal growth (rows), shaded by deviation from the base-case value.

TV growth ╲ WACC7.0%8.0%9.0%10.0%11.0%
1.5%$208$176$153$136$122
2.0%$224$187$161$142$126
2.5%$244$201$171$148$131
3.0%$270$217$181$156$137
3.5%$303$236$194$165$144
How to read it
The spread between the corners tells you how much your conclusion depends on assumptions. If the value holds up across most of the table, that’s a robust signal. If it only works in the most optimistic corner, your thesis is fragile — proceed with caution. Try the same four steps on a real company in the Rankings.

Check your understanding

In a DCF model, you increase the discount rate from 8% to 10% while keeping everything else the same. What happens to the intrinsic value?

An analyst’s DCF shows a terminal growth rate of 6% in perpetuity. Why should this immediately concern you?

Your DCF produces an intrinsic value of $180; the stock trades at $165. The valuation only stays above $165 in the most optimistic corner of your sensitivity table. What’s the right conclusion?

Frequently asked questions

Frequently asked questions